Here’s the situation. You have two new 15-story buildings in a good location near downtown. Both buildings have received several inquiries from potential tenants. Building #1 is a traditionally-built, modern facility. Building #2 is similar, but it’s green (LEED-CS + LEED-CI). A lease for 40,000 square feet of space at #1 is $35 and #2 is $36.50 per square feet. Would you pay the extra $1.50 per square foot to lease space in the green building? We’re talking about a serious premium. I’m interested to hear what your perspective is on this.

According to the U.S. Green Building Council, these rents are justifiable for a few reasons. I’m going to clip out a few comments from their article, but feel free to read the entire thing.

Organizations with business models reflecting sustainability will be more likely to pay the premium.

Although green buildings are going up at an incredible rate, most of these are for use by the owners and most developers view speculative green developments as risky.

There is a dearth of tenable green lease space and requests for green space are falling on deaf ears.

The market is tenant driven right now and tenants have had success cooperating with owners to make green improvements or renovations.

I think there will be a paradigm shift, but I don’t know how it will happen. Somehow, the values of individuals and organizations need to shift towards an appreciation of sustainability, and that will create serious, mainstream adoption of green buildings. Maybe the impetus will be regulatory? Self-imposed? Strategic? I learned in Starting a Business 101, that some of the best opportunities in business become available due to a void or an absence in the market. If it’s true that some customers and tenants are requesting green space, but the inventory isn’t available, there’s a void in the market that will be filled by the first innovators. The rest will wake up some day and think, "I thought green buildings were for hippies?! What’s going on?" Which is partially an answer to my post the other day. Via Appraisal Podcasts.

An instant-to-mind question, before I can answer yours: won’t the LEED building be cheaper to run? If so, by how much?

The Green Building Council article emphasizes yet again that the demand isn’t the issue, but the willingness to change (on the developers side). If you’ve been building a certain way for years, it’s hard work to bend your accumulated knowledge into another shape. There’s a huge role to be played by green building schools me thinks, combined with a little pressure from above – in the form of transitional, progressive building regulations.

http://tomkonrad.wordpress.com Tom Konrad

I agree with the last commenter… the owner of the building typically is the one who reaps the energy benefits. That said, the tenant also reaps some benefits, in more comfotable and naturally lit workspace. I’d certainly pay a premium, but just knowing the other space is “non-LEED” doen’t really give enough info on how much.

If we can shift our rental culture to one in which the tenant pays the energy bills, then we’d be sure to see a big premium on LEED space.

http://www.jetsongreen.com Preston

Craig + Tom,

You bring up some good points. From the hypothetical, I think it’s purely from the first costs analysis only. So while there is a premium at the beginning, you will get some of it back in energy savings. To be honest, I’m not sure how the numbers would work out.

As far as the burden of paying utilities goes, it’s different everywhere. Depending on the lease, owners may pay, but from what I understand, 58% of office buildings do not have utilities in the office rent (meaning tenants pay for them). When the burden is split between owners and tenants, tenants have to really cooperate with owners to get energy efficient upgrades.

This issue is compounded by build-and-flip developers. They get it built, lease it out, and sell it off. These types do not have an interest in the long-term operation capabilities of the building, so unless tenants demand that the structure is energy efficient, nothing happens.

There’s been talk about trying to use a green lease and what not, but really, I think it will take smart tenants that work the numbers to create a move towards the green buildings. Here’s a good article: